Right now I'm looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to return to historic highs.
Today I'm looking at Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) to ascertain if its share price can return to 976p.
Lloyds' share price reached an all-time high of 976p per share during the first half of 1999, just before the FTSE 100 as a whole reached its own record high of 6,930. Unfortunately, the bank's share price has not been able to return to this level at any point during the past decade. Indeed, even pre-credit crunch back during 2007, the bank's shares only managed to push as high as 591p per share.
But did Lloyds deserve this lofty valuation at the time? Well, when Lloyds' share price reached 976p, it was just about to report a profit attributable to shareholders of £2.5 billion for 1999. At the time, the bank only had 5.5 billion shares in issue, giving an EPS figure of 46.2p. Based on the current share price, this indicates that the bank was trading at a historic P/E ratio of 21 -- not too taxing considering that the rest of the market was trading at a similar lofty valuation.
But can Lloyds return to its former glory?
However, nowadays things are slightly different for Lloyds. In particular, after the bank was forced to seek a bail-out back in 2009, Lloyds' share count rocketed to around 71 billion shares in issue. According to my calculations, based on this figure, the bank would have to produce a profit of around £30 billion to achieve EPS of 46.2p. An unrealistic figure as international banking peer, HSBC only produced a profit of approximately £13 billion for full-year 2012.
That said, I would not rule out the bank returning some profit to investors through a share buyback, which would reduce the number of shares in issue. Although, it would take an extremely aggressive share buyback to be able to reduce Lloyds' share count to a level that would allow it to report EPS of more than 40p.
Still, there is scope for the bank to push higher in the long-term, although I would not like to speculate how much high the share price could move from current levels.
Nonetheless, Lloyds' net interest margin is currently compressed by the Bank of England's low base rate and a widening of this would boost the company's income. In addition, the aggressive cost cutting plan, which has taken place during the past few years should widen profit margins. So, Lloyds' share price could be in line for a re-rating in the future.
Overall, with so many shares now in issue, Lloyds is going to find it hard to generate enough profit to trade at a valuation that would justify a share price of 976p, or even the pre-credit crisis level of 591p.
So overall, I feel that Lloyds cannot return to 976p.
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In the meantime, please stay tuned for my next FTSE 100 verdict.